Administration of the Tariff Concession System

The Auditor-General Performance Audit Administration of the Tariff Concession System Australian Customs and Border Protection Service Australian National Audit Office

Commonwealth of Australia 2015 ISSN 1036 7632 (Print) ISSN 2203 0352 (Online) ISBN 978 1 76033 002 6 (Print) ISBN 978 1 76033 003 3 (Online) Except for the content in this document supplied by third parties, the Australian National Audit Office logo, the Commonwealth Coat of Arms, and any material protected by a trade mark, this document is licensed by the Australian National Audit Office for use under the terms of a Creative Commons Attribution NonCommercial NoDerivatives 3.0 Australia licence. To view a copy of this licence, visit http://creativecommons.org/licenses/by nc nd/3.0/au/. You are free to copy and communicate the document in its current form for non commercial purposes, as long as you attribute the document to the Australian National Audit Office and abide by the other licence terms. You may not alter or adapt the work in any way. Permission to use material for which the copyright is owned by a third party must be sought from the relevant copyright owner. As far as practicable, such material will be clearly labelled. For terms of use of the Commonwealth Coat of Arms, visit the It s an Honour website at http://www.itsanhonour.gov.au/. Requests and inquiries concerning reproduction and rights should be addressed to: Executive Director Corporate Management Branch Australian National Audit Office 19 National Circuit BARTON ACT 2600 Or via email: publications@anao.gov.au. 2

Canberra ACT 5 February 2015 Dear Mr President Dear Madam Speaker The Australian National Audit Office has undertaken an independent performance audit in the Australian Customs and Border Protection Service titled. The audit was conducted in accordance with the authority contained in the Auditor-General Act 1997. Pursuant to Senate Standing Order 166 relating to the presentation of documents when the Senate is not sitting, I present the report of this audit to the Parliament. Following its presentation and receipt, the report will be placed on the Australian National Audit Office s website http://www.anao.gov.au. Yours sincerely Ian McPhee Auditor-General The Honourable the President of the Senate The Honourable the Speaker of the House of Representatives Parliament House Canberra ACT 3

AUDITING FOR AUSTRALIA The Auditor General is head of the Australian National Audit Office (ANAO). The ANAO assists the Auditor General to carry out his duties under the Auditor General Act 1997 to undertake performance audits, financial statement audits and assurance reviews of Commonwealth public sector bodies and to provide independent reports and advice for the Parliament, the Australian Government and the community. The aim is to improve Commonwealth public sector administration and accountability. For further information contact: The Publications Manager Australian National Audit Office GPO Box 707 Canberra ACT 2601 Phone: (02) 6203 7505 Fax: (02) 6203 7519 Email: publications@anao.gov.au ANAO audit reports and information about the ANAO are available on our website: http://www.anao.gov.au Audit Team Kate Cummins Jillian Blow Jay Reid Mark Simpson 4

Abbreviations AAT CAB CEO CMP Customs EGS EPBS the Gazette ICS IDM Industry MOU PBS PCI PTV TA TARCON TCO TCR TCS Administrative Appeals Tribunal Compliance Assurance Branch Chief Executive Officer Compliance Monitoring Program Australian Customs and Border Protection Service Excluded Goods Schedule Enhanced Project By law Scheme Commonwealth of Australia Tariff Concession Gazette Integrated Cargo System Illustrative Descriptive Material Department of Industry Memorandum of Understanding Portfolio Budget Statements Pre Clearance Intervention Post Transaction Verification Tariff Advice Tariff Concession (Information Management) System Tariff Concession Order Targeted Compliance Response Tariff Concession System 5

Glossary Administrative Appeals Tribunal Provides an independent merits review of a wide range of administrative decisions made by the Australian Government and some non government bodies. Enhanced Project By law Scheme Excluded Goods Schedule Illustrative Descriptive Material Integrated Cargo System An Australian Government industry assistance program that provides an avenue for duty free concessions in certain circumstances for eligible imported capital goods. The scheme is currently administered by the Department of Industry A listing of goods that are excluded from the Tariff Concession System. A complete list can be found in Regulation 185 and Schedule 2 to the Customs Regulations. The illustrative descriptive material (IDM) is material provided with a Tariff Concession Order (TCO application to support the description of goods that the TCO is intended to cover. A computer system used by Customs for reporting the movement of goods across Australiaʹs borders. National Trade Advice Centre A section within Customs responsible for providing assistance on issues relating to the Tariff, including the provision of Tariff Advices/Advance Rulings. TARCON The Tariff An information management system that Customs uses to support the management of TCOs. The Tariff, also known as the Harmonised Commodity Description and Coding System, or the Harmonised System of Tariff Nomenclature is an internationally standardised system of names and numbers used to classify traded products. 6

Contents Abbreviations... 5 Glossary... 6 Contents... 7 Summary and Recommendations... 11 Summary... 13 Introduction... 13 Audit objective and criteria... 16 Overall conclusion... 16 Key findings by chapter... 18 Summary of entity response... 22 Recommendations... 23 Audit Findings... 25 1. Background and Context... 27 Introduction... 27 Tariff Concession System... 27 Administrative arrangements... 35 Related programs... 35 Reviews of the Tariff Concession System... 36 Audit objective, criteria, scope and methodology... 37 Report structure... 38 2. Administrative Arrangements... 40 Introduction... 40 Oversight arrangements for the Tariff Concession System... 40 Stakeholder engagement... 41 Staffing arrangements and guidance materials... 49 Information management... 50 Performance monitoring and reporting... 53 Conclusion... 54 3. Assessing Tariff Concession Order Applications... 56 Introduction... 56 Receipt of applications... 58 Assessment of applications... 59 Decision review process... 72 Complaints management... 74 Conclusion... 74 7

4. Managing Current Tariff Concession Orders... 76 Introduction... 76 Revocations requested by local manufacturers... 76 Customs-initiated Tariff Concession Order revocations... 78 Review of current Tariff Concession Orders... 83 Conclusion... 87 5. Compliance with Tariff Concession Orders... 88 Introduction... 88 Risk assessment and targeting process... 90 Conduct of compliance activities... 94 Compliance monitoring guidance... 103 The new operating environment... 104 Conclusion... 104 Appendices... 109 Appendix 1: Entity response... 111 Index... 112 Series Titles... 113 Better Practice Guides... 116 Tables Table S.1: TCO applications (2012 13 and 2013 14)... 14 Table 1.1: TCO applications (2012 13 and 2013 14)... 31 Table 1.2: TCO revocations (2013 14)... 33 Table 1.3: Report structure... 39 Table 3.1: ANAO s assessment of applicant letters to potential manufacturers against the legislative criteria of a TCO... 64 Table 3.2: Reasons for Customs return of TCO applications... 66 Table 3.3: Documenting reasons for TCO decisions... 70 Table 3.4: Internal review applications and outcomes (2012 14)... 72 Table 4.1: Reasons for the revocation and reissue of TCOs in the ANAO s sample... 83 Table 5.1: Coverage of PTV and TCR activities undertaken by CAB (2012 13 and 2013 14)... 90 Table 5.2: PTV and TCR results by CAB targeted to Revenue concession item (2013 14)... 102 8

Figures Figure 1.1: Example of a Tariff Concession Order... 30 Figure 3.1: Tariff Concession Order application assessment process... 57 Figure 3.2: Tariff Concession Order applications and orders made for the period 2010 14... 58 Figure 4.1: Revocation application assessment process Australian manufacturer initiated... 77 Figure 4.2: Examples of redundant or partially redundant Tariff Concession Orders... 86 9

Summary and Recommendations 11

Summary Introduction 1. Customs duty and Commonwealth taxes are imposed on certain goods when they are imported into Australia, with the rate of duty payable determined by the tariff classification of the goods. Imposing duty on certain imported goods is designed to influence the flow of trade by regulating their value to protect Australia s local economy and industry. There are, however, a number of ways that importers can obtain duty free entry of imported goods into Australia, including through accessing free trade agreements 1 and through the use of duty concession schemes, such as the Tariff Concession System (TCS). Tariff Concession System 2. The TCS, which was established in its current form in 1992 2, is intended to assist Australian industry and to reduce costs to the general community where the imposition of a tariff serves no industry assistance purpose. That is, where no local manufacturer produces substitutable goods. 3 The Department of Industry (Industry) is responsible for the policy framework underpinning the operation of the TCS, while the Australian Customs and Border Protection Service (Customs) is responsible for the administration of the system as part of its wider responsibilities for managing border risks. 3. To receive a duty concession under the TCS, an imported good must be covered by a current Tariff Concession Order (TCO). A TCO consists of a tariff classification and descriptive text, which together describe the good that is covered by the order. Once a TCO has been made by Customs, it is available for use by any importer that seeks to import goods that correspond to the description and tariff classification. In 2013 14, around $1.8 billion in revenue to 1 A free trade agreement is an international treaty that removes barriers to trade and facilitates stronger trade and commercial ties, contributing to increased economic integration between participating countries. As of January 2015, Australia had nine free trade agreements in force (with these agreements accounting for 42 per cent of Australia's total trade). 2 Prior to November 1992, the TCS operated under a different legislative regime generally referred to as Commercial Tariff Concession Orders (CTCO). The most recent substantial legislative change to the system occurred in 1996 when the market test was removed from TCS eligibility criteria. The market test considered whether the Australian and imported goods competed in the same market and, therefore, took into account quality, price and technical sophistication. 3 Substitutable goods are Australian-made goods that have a use corresponding to the use of the imported goods. 13

the Commonwealth was forgone through the use of TCOs, with Customs estimating that the amount of revenue forgone will increase to around $1.9 billion in 2014 15. Assessing a Tariff Concession Order application 4. The legislated process for assessing a TCO application involves two stages. The first stage assesses the validity of the application, with the details of a valid application published in the weekly Commonwealth of Australia Tariff Concessions Gazette (the Gazette), which facilitates any objections from local manufacturers. The second stage, which must occur between 50 and 150 days after notification of an application in the Gazette, requires Customs to determine whether a TCO will be made. 5. Customsʹ decision as to whether or not to make a TCO is to be based on the information contained in the application and subsequent submissions from the applicant, any objections from local manufacturers to the proposed TCO and the results of any additional inquiries made by Customs. 4 Once made, a TCO is available to all importers of the described goods unless it is revoked. In 2013 14, Customs received 941 TCO applications, 133 objections and made 770 TCOs (see Table S.1. for further details). Table S.1: TCO applications (2012 13 and 2013 14) Application Actions Number (1) Initial Stage (prior to gazettal) 2012 13 2013 14 Applications received 998 941 Applications rejected 99 36 Applications withdrawn 118 96 Approval Stage (after gazettal) 2012 13 2013 14 Objections received 88 133 TCOs made 762 770 TCOs refused 43 79 Source: Note 1: ANAO analysis of Customs information. There is a lag of up to 150 days between the gazettal of an application and making a decision. As a result, the number of applications and decisions do not align within a 12-month period. 4 The applicant may submit additional information to Customs, for example additional illustrative descriptive material or changes to the wording of the potential application. Where a local manufacturer has been identified, these changes may be the result of the applicant and the local manufacturer agreeing to a narrowing of the descriptive text to the TCO. 14

Summary Revoking a Tariff Concession Order 6. There are a number of circumstances under which a TCO may be revoked, either at the initiation of a local manufacturer or the Chief Executive Officer (CEO) of Customs. A local manufacturer initiated revocation places the onus on the applicant to demonstrate why a TCO should be revoked by providing evidence of the local manufacture of a substitutable good. Once an application for revocation has been lodged, a decision is made by Customs based on the information provided in the request and any further inquiries undertaken. Where Customs decides that the TCO should be revoked, the revocation takes effect from the date that the request for revocation was received, not the date of the decision. In 2013 14, Customs received 45 applications from local manufacturers for the revocation of a TCO, with 43 of these being upheld. Managing Tariff Concession Order compliance 7. Managing importer compliance with TCO requirements underpins the effective operation of the TCS, supports Australian manufacturers through the proper implementation of the tariff, and helps to ensure the correct collection of customs duty. The primary risk related to the TCS is the misapplication of a duty concession to goods that do not adhere to the nominated TCO descriptions. 8. Prior to 1 July 2014, Customs Compliance Assurance Branch (CAB) was responsible for enforcing compliance with TCS requirements. CAB adopted an ʹintelligence led, risk basedʹ approach to managing compliance risks. Where a risk had been identified, it was rated and treated according to the level of risk it represented and the resources available at the time. From 1 July 2014, enforcement action relating to economic risks the risk most relevant to the TCS became the responsibility of the newly formed Strategic Border Command Division within Customs. Within Strategic Border Command, Customs has created a Revenue and Trade Crime Task Force with responsibility for coordinating a number of compliance activities 5, including 5 All references to compliance activities in this report relate to the activities for which Customs Compliance Assurance Branch (CAB) was responsible. 15

enhancing Customs revenue collection at the border. 6 It is intended that responsibility for managing enforcement action will move to the newly established Australian Border Force, which will be established as a border agency within the Department of Immigration and Border Protection by 1 July 2015. 7 Audit objective and criteria 9. The objective of the audit was to assess the Australian Customs and Border Protection Serviceʹs administration of the Tariff Concession System. 10. To form a conclusion against the objective, the audit adopted the following high level criteria: an appropriate governance framework to support the effective operation of the system was established; a consistent, accountable and transparent assessment process for TCO applications has been implemented; processes and systems for the ongoing management, review and eventual revocation of TCOs are effective; and the approach to managing compliance with TCO requirements was sound. Overall conclusion 11. Imposing duty on certain imported goods is designed to influence the flow of trade by regulating their value to protect Australia s local economy and industry. In 2013 14, goods to the value of $338 billion were imported into Australia, with $9.3 billion in customs duty collected. There are, however, a number of ways that importers can obtain duty free entry of imported goods to Australia, including through accessing duty concession schemes, such as the Tariff Concession System (TCS). To receive a duty concession under the TCS, an imported good must be covered by a current Tariff Concession Order (TCO) 6 As part of the 2012 13 Mid-Year Economic and Fiscal Outlook, the Government approved a proposal to fund increased compliance activity across the forward estimates to address economic risk, including revenue leakage. As a part of the documentation supporting this proposal, Customs has estimated that the compliance component of the measure will increase revenue by $57 million over the forward estimates period. This proposal also included funding for the review of TCOs. 7 The Australian Customs and Border Protection Service will cease to exist in its current form on 30 June 2015. 16

Summary made by Customs. A TCO consists of a tariff classification and text describing the good. As at October 2014, there were over 15 000 current TCOs available for use by importers. Under the TCS, around $1.8 billion in revenue to the Commonwealth was forgone in 2013 14. 12. Customs is responsible for administering the TCS, including assessing TCO applications, objections and revocations. In 2013 14, Customs received 941 applications for, and 133 objections to, TCO applications, made 770 TCOs, refused 79 TCOs and revoked 327 TCOs. Customs is also responsible for managing compliance with TCS requirements and providing assurance that importers applying a TCO to reduce customs duty are eligible to do so. 13. The TCS is supported by mature administrative arrangements that provide a generally sound basis for the assessment and management of TCOs, including the processing of TCO applications, objections, revocations, as well as the management of TCOs that are in use. There are, however, aspects of Customs administrative arrangements that could be further improved, including by: developing a communications strategy for the TCS to maximise the effectiveness of communications and awareness raising activities, with a particular focus on local manufacturer engagement; and more clearly documenting TCO application assessment activities, in particular the basis on which applications are assessed as meeting legislative requirements, to provide greater assurance regarding the integrity of the assessment and decision making process. 14. Within the context of Customs broader compliance responsibilities, the limited resources assigned to TCS compliance are allocated on a risk basis and, overall, the small number of targeted compliance activities undertaken has identified TCO misuse. Nevertheless, Customs is not well placed to determine whether its activities directed at managing TCS compliance, including education and awareness activities through to enforcement action, are effectively addressing the risks arising from TCO misuse. This is primarily due to the: manner in which Customs collects and stores its compliance data, which makes it difficult to verify the number, scope and outcome of compliance activities; and absence of an appropriate set of performance measures against which an assessment of the effectiveness of compliance activities can be undertaken. 17

15. To further improve Customs administration of the TCS and strengthen compliance monitoring arrangements, the ANAO has made three recommendations designed to: enhance engagement with key stakeholders; provide greater assurance regarding the assessment and decision making process; and improve the monitoring and reporting of compliance activities. Key findings by chapter Administrative Arrangements (Chapter 2) 16. Governance and oversight arrangements have been established by Customs to facilitate its delivery of the TCS, including appropriate management arrangements that provide a sound basis for the effective delivery of the system. There is, however, scope to better define the responsibilities of the policy entity (Department of Industry) and the delivery entity (Customs) through the expansion and endorsement of the proposed TCS schedule to the current Memorandum of Understanding (MOU) between the two entities. 17. The achievement of the Government s objectives for the TCS is reliant on effective stakeholder engagement, with Customs required to communicate with a broad range of stakeholders with diverse interests. Customs current approach to stakeholder engagement relies heavily on direct communications with manufacturers in relation to specific TCO applications, supplemented by general information on the system, which is communicated through Customs website, and TCO specific communication through the gazette. While direct communication on matters relevant to individual manufacturers has been well received, this approach is resource intensive. In relation to the published materials that are currently available to stakeholders, there is scope for Customs to review the accessibility and coverage of TCS information to better support a broader range of local manufacturers. The development of a communications strategy, implemented in conjunction with enhancements to the information currently available on Customs website, would assist Customs to better direct its limited resources to those activities that enable key stakeholders to effectively engage with the system. 18. The administration of the TCS is underpinned by two information management systems TARCON and Compliance Central as well as the creation of paper files to record aspects of the assessment and compliance processes. There are, however, functionality issues that adversely impact on the extent to which these systems have supported the effective delivery of the TCS. Where data has been captured in TARCON in relation to the assessment 18

Summary process, extracting the data to inform internal decision making has been difficult and time consuming. As a result, assessment officers have introduced workarounds to address known functionality limitations that, ultimately, increase the risks to the integrity of the data and create inefficiencies. 8 19. Similarly, the capture of compliance data in Compliance Central and the subsequent analysis and use of this data to inform the continuum of compliance activities from education and awareness through to enforcement has also been limited because of the lack of system functionality. As a result, CAB was unable to accurately report with a sufficient level of confidence the complete number, scope and outcome of compliance activities. Variability of compliance data over time has also affected the overall integrity of reported information. There is considerable scope for Customs to strengthen its approach to the management of compliance data as it transitions to the new operating environment within the Department of Immigration and Border Protection. Assessing Tariff Concession Order Applications (Chapter 3) 20. Customs receives approximately 940 TCO applications every year, with around 80 per cent of applications resulting in a TCO being made. Customs has implemented generally sound practices to assess TCO applications, with appropriate processes in place to determine the validity of applications through an eligibility assessment process, such as the establishment of a pre screening checklist to determine whether applicants met legislated eligibility requirements. 9 21. There are, however, aspects of the TCS that make the assessment process difficult. In particular, the requirement for applicants to have undertaken appropriate searches for local manufacturers of substitutable goods is difficult for Customs officers to accurately assess. In effect, there is a strong disincentive for full disclosure of an applicant s knowledge of local manufacturing as the presence of a local manufacturer may mean that a TCO is not made. This disincentive, coupled with the range of ways that evidence of appropriate searches can be manipulated (for example, the use of different 8 For example, the implementation of a manual check to reconcile the accuracy of the data exchanged between TARCON and Customs Integrated Cargo System. 9 In the ANAO s sample, 261 of 264 applications (99 per cent) had a pre-screening checklist retained on file. 19

search terms across multiple search engines) adds to the complexity of the assessment process. With regard to the assessment process, Customs is yet to establish a compliance model that provides a framework for addressing applicants non compliance and developing responses according to the nature, level and cause of non compliance and the level of co operation from applicants. 22. The decisions relating to the TCO applications examined by the ANAO were made by a Customs officer with the required delegation. However, the extent to which the rationale for these decisions was documented was inconsistent. The absence of appropriate documentation to support key decisions makes it more difficult to determine the basis on which the delegate, on behalf of the CEO, considered that the application fulfilled legislative requirements. There would be benefit in Customs strengthening its guidance to assessment officers and reinforcing the importance of documenting key decisions to improve the transparency and accountability of the TCO decision making process. 23. The framework for the TCS includes a number of opportunities for internal and external review of decisions, in addition to a process for compliments and complaints management. These arrangements provide an appropriate framework for the review of decisions. There would, however, be merit in Customs implementing a risk based quality assurance program to examine a random selection of decisions, including decisions to make a TCO, which, by their nature, are unlikely to be referred by applicants for review. 10 Managing Current Tariff Concession Orders (Chapter 4) 24. In general, Customs has implemented effective arrangements to manage TCOs once they have been made, including processes for TCO review and revocation. In particular, appropriate processes are in place to respond to local manufacturer initiated revocations. In relation to the 10 revocations that were initiated by local manufactures in the ANAO s sample 11, all assessments were completed within the legislated timeframes and all decisions were made by appropriately delegated officers. 10 In general, reviews are sought by applicants when Customs decides not to issue a TCO. 11 The ANAO reviewed a sample of 282 TCOs (10 per cent of all TCOs made between 18 March 2011 and 18 March 2014). 20

Summary 25. In late 2012, Customs received budget funding to undertake a review to help ensure the ongoing validity of TCOs. This funding was provided on the basis of 1000 TCOs being reviewed annually. Customs has not, however, recorded the total number of reviews undertaken on an annual basis and has not reported on its progress against this annual target, rather it has reported on the number of TCOs revoked and the potential duty recovered. 12 There is scope for Customs to improve aspects of its management of the TCO review program, including: enhancing the documentation of the risk analyses used to inform program activity; and strengthening the reporting of progress against the commitments that were established in the initial proposal to government. Compliance with Tariff Concession Orders (Chapter 5) 26. Economic risks, such as the misuse of a TCO or other concession item, were considered by Customs to present a medium risk and it was determined that the Compliance Assurance Branch (CAB) would focus its efforts on reducing and containing the risk. 13 CAB collected intelligence relating to compliance with the TCS through compliance activities (including general monitoring, campaigns and projects) and stakeholder engagement. The limited data retained by CAB indicated that its compliance program was targeted towards TCO related imports that were considered to present a higher risk of TCO misuse. However, the manner in which compliance data is collected and stored did not allow Customs to verify this information, which undermines the confidence that can be placed in the reported performance relating to compliance activities (to both internal management and external stakeholders). 14 Further, in relation to the limited number of targeted campaigns and projects established by Customs to address TCO misuse, performance measures had not been established by CAB that would inform an assessment of the extent to which campaign objectives had been achieved. As such, CAB was not well placed to determine the effectiveness of its program of compliance activities. 12 Customs has reported notional duty based on duty paid in one full financial year prior to revocation. Customs notes that the duty is notional because the TCOs cannot be used after revocation. 13 Until July 2014, CAB was assigned primary responsibility for the following risks: economic (revenue) including TCO compliance management, cargo control and regulated goods. 14 The compliance data retained by Customs is live, which, in effect, means that the results reported at one point in time may not be replicable at a future point in time because the source records have been changed. 21

27. Tariff concession schemes are complex to administer, with the management of compliance requiring specialist knowledge and a detailed understanding of the relevant legislation and regulation. Customs does not, however, provide training to its compliance officers on the specific requirements of the TCS. Providing increased support to officers undertaking compliance activities would better place Customs to more effectively deliver these activities and manage the risks in relation to the incorrect application of TCOs. 28. Customs is currently implementing a number of significant reforms, including its amalgamation with the Department of Immigration and Border Protection and the restructure of its compliance function. As the revised arrangements are yet to be fully implemented, it is not possible to determine at this stage the extent to which the arrangements will have an impact on compliance activity for the TCS. There would, however, be merit in Customs reflecting on the findings of this report when implementing revised compliance arrangements as part of its reform agenda. Summary of entity response 29. Customs summary response to the proposed report is provided below, while the full response is provided at Appendix 1. The Australian Customs and Border Protection Service (ACBPS) notes the ANAO finding that the Tariff Concession System (TCS) is supported by mature administrative arrangements that provide a sound basis for assessment and management of Tariff Concession Orders (TCO), including the processing of TCO applications, objections, revocations, and the management of TCOs that are in use. ACBPS acknowledges that the manner in which it collects and stores its compliance data makes it difficult to verify the number, scope and outcome of compliance activities and that performance measures could be improved. ACBPS will take measures to better support delivery and oversight of activities directed at the risk of TCO misuse. 22

Recommendations Recommendation No. 1 Paragraph 2.35 Recommendation No. 2 Paragraph 3.47 Recommendation No. 3 Paragraph 5.57 To build greater awareness and promote the Tariff Concession System, the ANAO recommends that the Australian Customs and Border Protection Service: a) develops a Tariff Concession System communications strategy, in consultation with the Department of Industry, aimed at increasing system awareness, with a particular focus on local manufacturer engagement; b) reviews the strategy periodically to inform the ongoing targeting and refinement of communication activities; and c) reviews the appropriateness and accessibility of Tariff Concession System information that is currently made available to stakeholders. Customs response: Agreed To improve the transparency and accountability of the Tariff Concession Order decision making process, the ANAO recommends that the Australian Customs and Border Protection Service strengthens its guidance to assessment officers and reinforces the importance of documenting key decisions. Customs response: Agreed To better support the delivery and oversight of compliance activities directed at managing the risk of Tariff Concession Order misuse, the ANAO recommends that the Australian Customs and Border Protection Service: a) strengthens its approach to the management of compliance data to better inform its monitoring and reporting of compliance activities; and b) develops an appropriate set of performance indicators and regularly assesses its performance against these to determine the effectiveness of its compliance program. Customs response: Agreed 23

24

Audit Findings 25

1. Background and Context This chapter provides an overview of the Tariff Concession System and outlines the Australian Customs and Border Protection Serviceʹs approach to assessing applications for, objections to, and applications to revoke Tariff Concession Orders. It also sets out the audit objective and approach. Introduction 1.1 Customs duty and Commonwealth taxes are imposed on certain goods when they are imported into Australia, with the rate of duty payable determined by the tariff classification of the goods. Imposing duty on certain imported goods is designed to influence the flow of trade by regulating their value to protect Australia s local economy and industry. In 2013 14, Customs facilitated the importation of 30.6 million air cargo and 2.9 million sea cargo consignments. 15 It was also responsible for collecting customs duty and border related taxes and charges, which totalled $13.7 billion. 16 1.2 There are, however, a number of ways that importers can obtain duty free entry of imported goods into Australia, including through accessing free trade agreements 17 and duty concession schemes, such as the Enhanced Project By law Scheme (EPBS) 18 and the Tariff Concession System. Tariff Concession System 1.3 The Tariff Concession System (TCS), which was established in its current form in 1992 19, is intended to assist Australian industry and to reduce 15 For the purposes of this report, the ANAO has used the term consignment to include both air cargo consignments and sea cargo manifest lines. 16 This amount includes $9.3 billion in customs duty, $3.4 billion in goods and services tax and $847 million in passenger movement charges. 17 A free trade agreement is an international treaty that removes barriers to trade and facilitates stronger trade and commercial ties, contributing to increased economic integration between participating countries. As of January 2015, Australia had nine free trade agreements in force (with these agreements accounting for 42 per cent of Australia's total trade). 18 The Enhanced Project By-law Scheme (EPBS) is an Australian Government industry assistance program that provides an avenue for duty-free concessions in certain circumstances for eligible imported capital goods. The scheme is currently administered by the Department of Industry. 19 Prior to November 1992, the TCS operated under a different legislative regime generally referred to as Commercial Tariff Concession Orders (CTCO). The most recent substantial legislative change to the system occurred in 1996 when the market test was removed from TCS eligibility criteria. The market test considered whether the Australian and imported goods competed in the same market and, therefore, took into account quality, price and technical sophistication. 27

costs to the general community where the imposition of a tariff 20 serves no industry assistance purpose that is, where no local industry produces substitutable goods. 21 1.4 There are certain classes of goods that are ineligible for concessions under the TCS, including: goods produced in industries where there is an established local manufacturing base including foodstuffs, clothing, cosmetics and furniture; or where the importation of a good is regulated or restricted. The tariff classifications for these goods are listed on an Excluded Goods Schedule (EGS). 1.5 To receive a duty concession under the TCS, an imported good must be covered by a current Tariff Concession Order (TCO). A TCO consists of a tariff classification and descriptive text, which together describe the good that is covered by the TCO. Once a TCO has been made by Customs, it is available for use by any importer that seeks to import goods that correspond to the description and tariff classification. In 2013 14, around $1.8 billion in revenue to the Commonwealth was forgone through the use of TCOs, with Customs estimating that the amount of revenue forgone will increase to around $1.9 billion in 2014 15. Applying for a Tariff Concession Order 1.6 The legislated process for assessing a TCO application is undertaken in two stages. The first stage assesses the validity of each application, with the details of a valid application published in the weekly Commonwealth of Australia Tariff Concessions Gazette (the Gazette). The second stage, which must occur between 50 and 150 days after notification of an application in the Gazette, requires Customs to determine whether the TCO will be made. Assessing TCO applications 1.7 A valid application is one that: is submitted on the approved form, and contains the information required by the form; 20 Tariff concessions provided through the TCS apply only to ordinary Customs duties imposed under the Customs Tariff Act 1995. Dumping and countervailing duties are not ordinary Customs duties imposed under the Customs Tariff Act 1995, but special duties imposed under the Customs Tariff (Anti-Dumping) Act 1975. 21 Substitutable goods are Australian-made goods that have a use corresponding to a use of the imported goods. 28

Background and Context contains a full description of the goods, including a statement of the tariff classification that, in the opinion of the applicant, applies to the goods; and discloses all information that an applicant has, or can reasonably be expected to have, about Australian manufacturers of substitutable goods or potential substitutable goods. This includes details of all inquiries made by the applicant to establish that there are reasonable grounds for asserting that there are no manufacturers of substitutable goods in Australia. 1.8 Following receipt of a TCO application, Customs has 28 days to process the application and determine whether it is valid. As soon as practicable after the validity of the application is determined, a notice must be published in the Gazette. Initially, Customs is required to verify the tariff classification and descriptive text of the TCO, assess the research supporting the application, and if necessary, undertake additional research of potential local manufacturing. Applications that are assessed as invalid by Customs will either be requested to be withdrawn or be rejected by the assessing officer. Making a Tariff Concession Order 1.9 Once made, a TCO is available to all importers of the described goods until it is revoked. 22 Customs decision on whether to make a TCO is to be based on: the information contained in the application; any objections from local manufacturers to the proposed TCO; any subsequent submissions provided by the applicant (including where the applicant and a local manufacturer have designed an alternate descriptive text); and the results of any additional inquiries made by Customs. 1.10 If there is no potential local manufacturer (identified either through Customs initiated research or by an objection made by a local manufacturer), 22 In 2010, changes to the Legislative Instruments Act 2003 caused 19 TCOs to expire. Customs used section 269J of the Customs Act 1901, which allows it to make a TCO without an application, to remake some, but not all of these TCOs. Only those that continued to meet the requirements of a TCO were remade. Customs subsequently petitioned for, and received, exemption for the TCS from the Legislative Instruments Act 2003, to prevent future occurrence of TCO expirations. 29

Customs is to make the TCO, notify the applicant in writing and publish the TCO details in the Gazette. A TCO will be available for use from the date of the application, not the decision. Where importations occur between the date of the application and the making of a TCO, importers may apply for a refund of any duty paid. An example of a TCO is provided at Figure 1.1. Figure 1.1: Example of a Tariff Concession Order Tariff Classification: 8544.49.20 TC 1432577 CABLES, DOWNHOLE, OIL AND/OR GAS WELL MONITORING SYSTEM, spool mounted, with OR without polymer encapsulation AND/OR cable end protectors, including ALL of the following: (a) insulated stranded conductor; (b) filler; (c) stainless steel tubing; (d) maximum working pressure rating NOT less than 650 bar Op. 11.09.14 Dec. date 01.12.14 Source: Customs Gazette No TC 14/47, Wednesday, 3 December 2014. Objections 1.11 Under the TCS, it is in the interests of local manufacturers to review the Gazette and consider whether they manufacture substitutable goods for those described in a TCO application. Customs may also contact potential local manufacturers to help ensure that reasonable grounds exist for believing that, on the day on which the application was lodged, there were no producers in Australia of substitutable goods. 1.12 If a local manufacturer decides to object to the TCO, they must do so within 50 days of the original gazettal date. However, Customs has a period of 150 days during which it may invite objections. A valid objection must be on the approved form and be supported by sufficient evidence to demonstrate that the locally manufactured goods are substitutable for the goods described in the TCO application. 23 Customs is also required to inform the applicant in writing and provide a short statement outlining the grounds on which each objection is based. The applicant and the objector may agree to an amendment 23 For goods to be considered as produced in Australia, they must be wholly or partially manufactured in Australia and not less than 25 per cent of the work or factory costs to produce the goods is represented by the sum of the value of Australian labour, materials and the factory overhead expenses incurred in Australia in respect of the goods. Goods are taken to have been wholly or partially manufactured in Australia if at least one substantial process in the manufacture of the goods was carried out in Australia. 30

Background and Context to the TCO description, such as narrowing the description of the goods with any revision to be included in a subsequent Gazette. 1.13 In 2013 14, Customs received 941 TCO applications, 133 objections and made 770 TCOs (see Table 1.1 for further details). Customs reported in its annual reports between 2011 12 and 2013 14, that it had met the legislated timeframes for the TCO decision making in all cases. 24 Table 1.1: TCO applications (2012 13 and 2013 14) Application Actions Number (1) Initial Stage (prior to gazettal) 2012 13 2013 14 Applications received 998 941 Applications rejected 99 36 Applications withdrawn 118 96 Approval Stage (after gazettal) 2012 13 2013 14 Objections received (2) 88 133 TCOs made 762 770 TCOs refused (3) 43 79 Source: ANAO analysis of Customs information. Note 1: Note 2: Note 3: There is a lag of up to 150 days between gazettal of a valid application and making a decision. As a result, the number of applications and decisions do not align within a 12-month period. When an objection is received, the applicant and the party objecting to the application may agree to a narrowing of the wording of the TCO. If this occurs, the TCO is recorded as made rather than refused. While multiple objections can be received against the making of a single TCO, if successful Customs systems only record the refusal against a single objection. Revocations 1.14 There are a number of circumstances under which a TCO may be revoked, either at the initiation of a local manufacturer or the Chief Executive Officer (CEO) of Customs. These circumstances include if the: requirements of a TCO were no longer being met (for example if an Australian manufacturer of substitutable goods submits a valid application for revocation, or if the goods described by the TCO were included on the EGS); 24 Australian Customs and Border Protection Service, Annual Report 2011 12, p. 78, Annual Report 2012 13, p. 51 and Annual Report 2013 14, p. 45. 31

TCO is no longer required as it has not been used in the preceding two years; or because the general tariff rate for that good has been reduced to free ; TCO contains a transcription error or error in the description of the TCO (including where changes to the Harmonised System 25, or a ruling of the Administrative Appeals Tribunal, have changed the tariff classification); or TCO contains a description of the goods in terms of their intended end use. 1.15 Similar to the objections process, a revocation initiated by a local manufacturer places the onus on the applicant to demonstrate why a TCO should be revoked. Once an application for revocation has been lodged, a decision is required within 60 days, based on the information provided in the request and inquiries made by Customs. Where Customs decides that the TCO should be revoked, the revocation takes effect from the date that the request was received, not the date of the decision. However, if Customs is satisfied that, by narrowing of the wording of a TCO, the TCO would only cover goods not manufactured in Australia, it may revoke and reissue a TCO with revised descriptive text. This process is known as a revoke reissue. 26 1.16 In 2013 14, Customs received 45 applications from local manufacturers for the revocation of a TCO. Of these, 43 were upheld. Table 1.2 summarises revocations of TCOs in 2013 14. 25 The Harmonised Commodity Description and Coding System, also known as the Harmonised System, is an internationally standardised system of names and numbers to classify traded products. It came into effect in 1988 and has since been developed and maintained by the World Customs Organization (WCO formerly the Customs Co-operation Council), an independent inter-governmental organisation. 26 A revoke-reissue may also be used by Customs under other circumstances for example, when a TCO needs to be changed because an amendment has been made to the Customs tariff or if there is a transcription error in the description of goods that are the subject of the TCO. 32

Background and Context Table 1.2: TCO revocations (2013 14) Local Manufacturer Initiated 2013 14 Received 45 (1) Upheld 43 Refused 4 Withdrawn 6 Cancelled 14 Customs Initiated Tariff classification change 2 Transcription error 1 Inadequate description 0 Goods excluded from the TCS because of EGS 1 Tariff reduced to a free rate 5 Subtotal revocations not related to the review 9 TCO review revocations Became aware of local manufacturer 15 Two years non use 303 Subtotal review related revocations 318 Source: ANAO analysis of Customs information. Note 1: There is a lag of up to two months between receiving an application and making a decision. This accounts for the discrepancy between the number of applications and the number of decisions. Targeted review of TCOs 1.17 In 2012 13, the Australian Government provided Customs with additional funding of $13.5 million over three years to expand its compliance assurance activities. This measure also provided Customs with additional staff to undertake a targeted review of current TCOs. 1.18 The first year of the targeted review focused on cookware and tableware, and led to the revocation of 16 TCOs and the receipt of a further 10 TCO revocation applications. Customs reported that the customs value 27 of goods that used these TCOs in the 12 months prior to them being revoked exceeded $200 million. 28 The review continued throughout 2013 14, with a total of 318 TCOs revoked as a result of local manufacturers being identified 27 Customs value is the total value of all items in a consignment and is used to determine the import duty that may be payable. 28 Australian Customs and Border Protection Service, Annual Report 2012 13, p. 76. 33

and/or because of two years non use of the TCO. Customs estimated that the notional duty 29 recovered in 2013 14 as a result of the review was $3.7 million. Compliance with the use of Tariff Concession Orders 1.19 The existence of a TCO allows importers concessional entry of goods into Australia, subject to the goods meeting the tariff classification and description of the TCO. Managing importer compliance with nominated TCOs underpins the effective operation of the TCS, supports Australian manufacturers through the proper implementation of the tariff and helps to ensure the correct calculation and collection of duty. 1.20 Prior to 1 July 2014, the Compliance Assurance Branch (CAB) in Customs was responsible for enforcing compliance with TCS requirements. 30 CAB was an organisational unit of the Compliance and Enforcement Division responsible for managing several categories of risk: regulated goods; economic (including revenue); and the cargo process, with an operating budget of around $27 million in 2013 14. CAB adopted an intelligence led, risk based approach to managing economic risk. Under this approach, where a risk was identified, it was rated and treated according to the level of risk it represented and the resources available at the time. 1.21 From 1 July 2014, CAB ceased to exist and enforcement action became the responsibility of Strategic Border Command. Customs has also established a Revenue and Trade Crime Task Force to drive and coordinate a number of activities, including Customs commitment to enhancing revenue collection at the border. 31 On 1 July 2015, responsibility for enforcement will move to the 29 Customs quotation of customs values and notional duty forgone refers to figures obtained in the (one) full financial year prior to revocation. Customs notes that the duty forgone is notional because the TCOs cannot be used after revocation. 30 In May 2014, the Government announced significant changes to Customs, including the consolidation of operational border functions with the then Department of Immigration and the creation of the Australian Border Force. The Australian Border Force will remain a part of the broader Department of Immigration and Border Protection, but will work as a single frontline operational entity. It will draw together the operational border functions of both agencies, including investigations, compliance, detention and enforcement. 31 As part of the 2012 13 Mid-Year Economic and Fiscal Outlook, the Government approved a proposal to fund increased compliance activity across the forward estimates to address economic risk including revenue leakage. As a part of the documentation supporting this proposal, Customs has estimated that the compliance component of the measure will increase revenue by $57.0 million resulting in an increase in GST payments to the States and Territories of $22.8 million over the forward estimates period. This proposal also included an element supporting the review of TCOs which is discussed in more detail in Chapter 4. 34